What Is A UCC Filing & How A UCC Lien Works

A UCC lien, or UCC filing, is a notice that a lender has a security interest in one or more of your assets. The term comes from a collection of established rules that govern how commercial transactions work in the United States, called the Uniform Commercial Code (UCC). UCC liens can be filed against businesses or individuals.

Strong borrowers may be able to qualify for business financing even if they have a UCC lien filed against them. For example, OnDeck, who sponsored this article and offers short term business loans and lines of credit, will take a 2nd position in some cases. Prequalifying online with OnDeck only takes a few minutes.

When A UCC Filing Occurs

When your business enters into a financing agreement that is secured by collateral, a UCC lien could be filed against any assets you pledged to secure the loan. A UCC lien does not generally hurt your business’s day-to-day operations, but could prevent you from getting additional funding before satisfying the lien.

While other types of liens typically get filed because of something bad happening, such as not paying your taxes, a UCC lien is a normal part of small business financing. The lien serves as notice to all potential creditors that you owe a lender money and that your assets are pledged to that lender until you repay the debt.

Where A UCC Filing Comes From

Generally a UCC filing begins when you agree to pledge assets to a lender for a loan or business line of credit by signing a security agreement. A security agreement gives the lender the right to use specific assets as collateral. Once that security agreement is signed, it is normal for a lender to file a UCC lien against the assets you pledged to give notice of their rights to any other potential lenders.

UCC liens can be filed against businesses or individuals. They work on a first come first serve basis, so if there is a default, the first lender to file a UCC lien will have first rights to that asset. The lender is reserving their spot in line to collect on the asset(s) you pledged to them.

For example, if Bank1 files a UCC lien on a piece of equipment, and Bank2 files a lien on the same equipment later, then Bank1 will get first rights to that equipment. If the business is in default and the asset is sold to pay off debts, then Bank1 will get repaid first and Bank2 will only get money after Bank1 has been repaid completely.

Generally, a UCC lien can be filed on the following types of assets:

Office equipment

Receivables

Inventory

Investment securities

Large operating equipment

Vehicles

Real estate

Commercial instruments (such as drafts or promissory notes)

Letters of credit

Other goods used or owned by the business

UCC liens prevent businesses from getting multiple loans collateralized by the same assets. Before these notices came along a business owner could get five loans on the same piece of farm equipment because none of the lenders knew about each other. Now anyone can do a public UCC search to determine what assets are available to be used as collateral during a loan application process.

UCC Liens Offer Protection Across State Lines

In many cases, business transactions occur across state or country lines. Meaning, companies based in New York tend to sell products or services to businesses in California or other states. Every state has their own commercial transaction laws that could complicate the protection of businesses during financing transactions.

The Uniform Commercial Code (UCC) protects businesses when doing business in many different states, forcing uniformity in how states deal with these transactions. UCC liens are a way for businesses to keep their financial interests when financing equipment, real estate, or taking business collateral for loans.

Two Common Types of UCC Liens

A UCC lien is filed when you owe a lender money and they want to reserve their spot in line for the assets you pledged to them. There are two common types of UCC liens.

The 2 common types of UCC liens are:

1. UCC Liens Against Specific Collateral

A UCC filing against specific collateral is when the creditor has a security interest in one or more asset, but does not have an interest in all of your business’s assets. In other words, you are using specific assets as collateral to secure your loan or credit agreement. Specific collateral liens are most common for loans that have a specific purpose, such as equipment financing and inventory financing.

For example, if you finance a semi truck you can expect the the lender to file a UCC lien and list the big rig as collateral. However, you typically wouldn’t need to pledge assets beyond the finances truck.

2. UCC Blanket Liens

A UCC blanket lien occurs when a creditor has a security interest in every asset of your business. When a blanket lien is filed against all of your assets then it becomes difficult to get additional funding for your business until the lien is satisfied and removed.

Blanket liens are common for traditional bank loans, SBA loans, and alternative business loans. SBA and traditional bank lenders use blanket liens to fully secure their loan. They factor all of your assets into their lending decisions. Alternative lenders use blanket liens when businesses do not have a lot of hard assets for a loan. Using an alternative lender is sometimes the only way to get funding when your business does not have enough assets to satisfy a traditional lender.

All lenders typically like blanket liens because their loan is secured with all of your assets instead of just one. A blanket lien can make the underwriting process more flexible, and allows lenders to provide funding more quickly.

“Banks will often require a business to have specific collateral, like real estate, in order to qualify for a loan. By using a blanket lien and personal guarantee, alternative lenders can help healthy businesses gain access to capital without requiring specific collateral to secure the loan.”

Generally banks will not carve out collateral unless they get something of equal value in return.

Inventory Financing

Specific Collateral

Lien should only be against the inventory.

Invoice Factoring

Specific Collateral

Lien should only be against the receivables.

Merchant Cash Advance

Blanket Lien

The majority of the time MCA lenders do not file liens.

How to Check if You Have a UCC Lien

If you are unsure whether or not you have a UCC filing you don’t need to panic.

“A UCC lien is just a notice, and generally does not impact your business if you do not need additional funding. If you currently have a security agreement with a lender then you should be able to use that as a guide to know what assets you potentially may have a UCC lien against.”

Checking for UCC liens is easy, but there are two things you need to know about before you start your search:

1. UCC-1 Financing Statements

A UCC-1 is a financing statement that must be filed with the Secretary of State (SOS) in the state your business is incorporated. Creditors file this to make a UCC lien claim “perfected” or valid. The UCC-1 financing statement contains a description of the lien, the identity of the lienholder, and the identity of the debtor.

All UCC lien filings are public records that give notice to other potential lienholders or creditors what assets you have already pledged to use as collateral. Below is an example of a UCC-1 financing statement (click to enlarge):

2. State By State Searchable UCC Lien Database

Each state has different ways to search for UCC filings, but generally they can be found on your state’s SOS website. Click on your state in our map below, or select it from the drop down box underneath the map, to start your UCC lien search, or visit this chart.

How a UCC Filing Can Impact Your Business

In most cases, a UCC filing will not have a direct impact to your business operations. If you do not have any additional borrowing needs and you do not default on your loan, then a UCC lien is not something you need to worry about.

However, the risks associated with having a UCC filing against your assets should be considered before starting a loan application process. There are 3 main risks to your business when you have a UCC lien.

1. UCC Liens Could Prevent Additional Borrowing

The way UCC liens most often affect small business owners is by preventing them from getting additional financing before satisfying the existing lien. A UCC lien will prevent you from obtaining most types of traditional business loans until the lien is paid off, and could even hurt your chances at qualifying for alternative loans.

For example, a bank will likely want all of your assets to be lien free in order to lend to you. If a business has an SBA 7a or SBA 7a express loan through a traditional bank, they will likely have a blanket UCC lien filed against all of the business’s assets.

As discussed above, getting a bank to carve out any of their security interests for another lender can be frustrating, and often it is not successful. An SBA borrower may find that they have the long-term financing that they need, but lack the short term working capital to bridge the business through their current situation.

If you have a UCC filing but need to obtain additional financing you typically have 3 options:

You can try to get your lender to carve out certain assets from their blanket lien so you can pledge it to another lender. This can be difficult and requires you to convince your lender that getting the additional financing will help your business, and you will still be able to meet your payment obligations.

You can try to find a lender that will refinance your current loan and combine your balance with your additional financing needs into a single loan. This pays off your current lender and allows you to pledge your assets to the new lender. However, this is can be a big undertaking depending on how much debt you have outstanding and what your current loan terms are.

You could also find a lender, such as OnDeck, that does not necessarily require a first position on collateral. These lenders will generally take a second position blanket lien on your assets, and focus on your business’s ability to make loan payments during the underwriting process.

The loan process can be time consuming and it can cost you money. You need to know before you start the process if there are any outstanding liens that could prevent your loan from being approved. That is why it is a good practice to routinely check what UCC liens have been filed against you. Ty Kiisel from OnDeck said:

“Because UCC liens are part of the public record, a best practice is to check for yourself if a lien has been removed before applying for a new loan.”

2. UCC Liens Could Impact Your Business Credit Report

While the presence of a UCC lien on your business credit report does not have an impact on your business credit score, lenders that check your credit will be aware of current and past UCC liens. The liens they see will factor into possible lending decisions. After all, the UCC lien reflects borrowing.

That borrowing (the amount borrowed, your payment history, etc.) will have an impact on your credit score. But a UCC lien, by itself, is not something that forces small businesses to consider ad credit business loans.

3. You Risk Losing Your Pledged Assets

Taking out any loan has some risk to it. When you are pledging business assets as collateral for a loan, then you are risking losing those assets at some point in the future if you default on the loan. If a UCC lien is filed against your business then those assets are currently at risk until you pay your debts in full.

Keep in mind that while a UCC filing gives notice of a lender’s rights to your assets, they still must file a legal action against your business to benefit from their claim on those assets.

How to Remove a UCC Lien

The first step to legally removing a UCC lien is to pay off the debt. The rules for releasing a UCC lien after the debt is paid vary by state, but there are 2 main ways to remove them:

The Lender Files a UCC-3 Financing Statement Amendment

You Can Swear an Oath of Full Payment at Your State’s SOS Office

Liens will still show up in a UCC search for up to five years after they are removed, but the search will show that the lien has been satisfied. They will not be removed from the database, but the database will show that you met your obligations to the lender and they no longer have any rights to your assets.

1. Lender Files a UCC-3

You can request that your lender files a UCC-3 financing statement amendment. This will remove the UCC lien. Lenders are not required to file this, and most will not do this automatically. UCC liens expire automatically after 5 years (but can be renewed by the lender on longer term loans). Since they automatically expire, most lenders do not bother filing releases unless a borrower requests they do so.

You can request removal of a UCC lien with your final payment, or any time after you have paid off your loan. When the lender receives your release request then they should start the process of filing the UCC-3 and give you confirmation of any filing.

OnDeck, for example, will send you a copy of the paperwork they file with your state. Every release request should include the original UCC-1 filing number, a reference to your full payment, and an official request to release the lien.

Additionally, below is an example of a UCC-3 Financing Statement Amendment:

2. Swear an Oath of Full Payment

You can go down to your state’s SOS office and swear an oath that the debt has been paid in full. You can do this at any time, and the lien will be removed the same as it would if your lender filed the UCC-3.Lying about these UCC liens can result in certain penalties that can include fines or jail time.

Bottom Line

UCC liens are not something you generally should be worried about or surprised by. The only potential drawback to having a UCC filing is not being able to get additional funding using your assets as collateral. Every time you enter into a financing agreement you should be aware that a UCC lien may be filed against your business’s assets.

If your business currently has a UCC filing against it from a traditional long term lender, and you are struggling to find additional financing, then you should consider a loan with OnDeck. OnDeck cares more about your business’s revenues than they do about collateral. They can fund up to $500,000 as quick as 1 business day. Visit them today to see how much you qualify for.

About the Author

Jeff White is a staff writer and financial analyst at Fit Small Business, specializing in Small Business Finance. As a JD/MBA, he has spent the majority of his career either operating small businesses (in the retail and management consulting spaces) or helping them through M&A transactions. When he is not helping small businesses, he spends his time teaching his five kids how to become entrepreneurs.

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Comments (84)Disclaimer: Reviews on FitSmallBusiness.com are the product of independent research by our writers, researchers, and editorial team. User reviews and comments are contributions from independent users not affiliated with FitSmallBusiness.com's editorial team. Banks, issuers, credit card companies, and other product & service providers are not responsible for any content posted on FitSmallBusiness.com. As such, they do not endorse or guarantee any posted comments or reviews.Post Your Comment

I’m a roofing company have completed replacement the new metal roof for 1 customer with brand new metal roof. We send him a bill of the work we have done but he never make any payment of it. Can I file this case on UCC?

Hi Kim, In this case, a UCC wouldn’t be the proper filing to ensure that you receive payment. Because the work was completed on a physical property, you will want to file a “mechanic’s lien” on the property. This gets recorded in the land records, and becomes a lien against the property. The exact process for filing a mechanic’s lien varies by state. You can inquire with the county office where the property is located to find out what the steps are and what you need to file to put the lien in place.

Thanks for your question! A UCC financing statement is simply a document used by lenders to “perfect” their lien against your assets. There are many types of loans where lenders use a UCC-1 to perfect their interest in your collateral. As example, most of the best unsecured business loans are supported by a UCC lien filing on business assets as extra protection in the event the business doesn’t pay. As another example, when you finance the purchase of equipment, a lender will file a UCC-1 to state their claim on the specific piece of equipment you purchased.

There are a lot of ways you can use your assets to make purchases for your business. The type of financing and lender that’s best for you will depend on your specific borrowing need. You should consider why you need the funds, as you evaluate small business loan options. If you need to purchase a specific piece of equipment, an equipment loan would be a great option. If you want to borrow against your accounts receivable, invoice financing might be a good option. If you just want access to credit in the case of an emergency, you might consider a small business line of credit. The key is to consider your needs first.

A pool company made an appointment to install my pool. However, the installer had new paperwork that I was supposed to take to the bank that day, have notarized and agree that I would allow a lien on my property until the financed part was paid. They are also saying they want to charge me 34% interest. I refuse to do this and have tried to cancel the contract. They say that if I do not do this they will not install the pool and that I still have to pay them the entire cost of the pool even though they will not install it. Once again, I refuse to sign these new finance papers that more than double the cost of the pool paid over 12 years and everything you pay on it is only interest until the interest is paid, ( the principal never goes down until the full finance charges are paid) Do I have anything to worry about? I tried to cancel the initial agreement within the three day period but they would not do it with a phone call. Then said, they would look into it and refused to contact me until after the penalty date. According to Reviews this has happened many times with this company and people were completely bullied into signing. I am not going to sign. Help.

Hi Jeff, my wife and I purchased a 4 unit investment property about 3 years ago (July 2015). Trying to make this short, in April of 2017 we received a certified letter from the daughter of the former owner stating that we stole the property. I called our property insurance, they hired a lawyer, and it was dismissed with prejudice. The lawyer found a ucc lien on our property from the daughter, stating her and heirs, that we owe 2,000,000 dollars. The property is worth around $200,000 and title insurance went through at closing (the lien was placed after closing). A tenant that still resides there told me the siblings of the former owner are very upset because they did not get any money from the sale. We have 2 years until we have to refinance with the bank. This is a fraudulent ucc lien. Can you please advise how to rid this false claim. We would greatly appreciate your advise.

I’m sorry to hear you are dealing with this! We can’t provide legal advice, which it sounds like you need to help to work through this situation. My recommendation is to find an attorney and provide them with the details. You might start simply with a firm like Rocket Lawyer to see what they suggest.

We manufacture goods and sell them to dealers on terms ranging from 30-60 days. One of our dealers recently filed bankruptcy and left us with $50k in bad debt. Would UCC filings help us in the future to protect our interest in our inventory and if so, would we need to file a UCC statement for each shipment that we send out on terms or can we file one blanket UCC statement?

A UCC filing may have protected you in the case of your customer’s bankruptcy, but not necessarily. There are lots of steps you need to take and legal rules you need to follow as a creditor to make sure your claim against your customer’s business assets is legal. Plus, businesses such as your customer also utilize financing, and so there’s nothing to say their lender didn’t already have a priority claim on their assets. All this said, you essentially need to perform a cost-benefit analysis to determine if the time and money it would take you to take a UCC filing is worth it to your business.

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